As small bond trade volumes grow, so does the need for precise pricing

What drives the bond market? Where institutions once dominated the asset class, the rise of retail investors, new products, and electronic trading is causing a paradigm shift in market structure. This shift has seen a dramatic jump in small trade volumes.

Traditionally, the pricing of small and mid-sized trades was neither prioritized nor scrutinized. Now, their expanded role in bond markets has underscored a need for accurate pricing. Even whale trades which grab headlines can be an amalgamation of individual, or separately managed accounts that are grouped for ease of execution. The adoption of electronic trading is also focused on the small end of the market – viewed as a relatively low-risk way to transact systematically.

This means the fixed income community is more sensitive to any mispricing of small trades, and it carries greater consequence in terms of accurate risk transfer. Precise pricing is fundamental to market confidence, staying compliant, and reducing tail risk that a given trade is wildly mispriced. Fortunately, TRACE and MSRB data allows the industry to derive quality pricing for the liquid part of the U.S. corporate and municipal bond markets.

At ICE, our proprietary technology and valuation techniques has allowed us to offer Size-Adjusted Pricing (SAP) for bond trades since 2016, as part of our trading analytics suite. The quality of our bond data means we can apply SAP to a wide range of securities, from European corporates and LATAM structured products to Asia-Pacific debt and everything in between. Our SAPs are intended to help value transactions and/or holdings that are smaller than the institutional round lot position represented by ICE’s evaluations, and we continue to evolve our offering, given the benefits to market confidence and transparency.

Separately, with all eyes to the U.S. Presidential election next month, there’s been a flurry of press around what history shows regarding equity market risk and return in an election year. I’d wondered if there were equivalent bond market patterns, but after our team crunched the numbers, the short answer is: NOT REALLY! For market pundits, it’s back to reading the tea leaves on jobs data, inflation, Fedspeak and economic growth.

Read more in the October 2024 Fixed Income Monthly report: https://www.ice.com/fixed-income-data-services/fixed-income/ice-fixed-income-monthly-report